A comparison of carbon emission trading systems in New Zealand and Canada: Diversity

is not a virtue in carbon law and policy

(Draft the final version of this paper will be published in volume 11:2 of the McGill
International Journal of Sustainable Development Law & Policy)
*

1.

Shaun Fluker

INTRODUCTION

Climate change resulting from excessive carbon1 emissions has been labelled the worlds
ultimate commons problem.2

More specifically, climate change is an open-access

commons problem. This arises when individual actors seeking to maximize their wellbeing deplete a resource because each actor has unimpeded access to the resource and
everyone rushes to consume until the resource is depleted or worse has collapsed.3 The
application of the commons problem to explain the decline or collapse of commercially
harvested ocean fish populations is perhaps the most well-known application of this
theory to environmental catastrophe.4
The global climate commons problem is one of excessive accumulation rather than
depletion, but the essential parameters of the issue remain the same: The overall cost of
excessive carbon emissions accumulating in the atmosphere is not internalized by
individual actors. In the absence of controls we all have unconstrained liberty to emit
carbon into the atmosphere, and will continue to do so because the marginal benefit of
activities such as burning fossil fuel exceeds the marginal cost of associated carbon
emissions that lead to climate change.

Shaun Fluker is an Associate Professor at the University of Calgary, Faculty of Law. The author thanks
the Te Piringa Faculty of Law at the University of Waikato in Hamilton, New Zealand for providing
research and institutional support for this project. The author also thanks anonymous referees for their
instructive comments on earlier drafts. Research funding for this project was provided by Carbon
Management Canada.
1
In this paper reference to carbon is intended to represent carbon dioxide and the suite of greenhouse gases
treated as its equivalent.
2
Robert N Stavins, The Problem of the Commons: Still Unsettled after 100 Years (2011) 101:1
American Economic Review 81 at 96-103.
3
Elinor Ostrom, Governing the Commons: The Evolution of Institutions for Collective Action (Cambridge
University Press, 1990) ch 1.
4
Ibid, ch 5.

Electronic copy available at: http://ssrn.com/abstract=2605911

The current rate of carbon emissions from human activity and the overall accumulation of
carbon in the atmosphere are at unprecedented levels.5 Carbon emissions from human
activity are identified as a contributing factor to the loss of arctic sea ice, rise in sea
levels, ocean acidification, and extreme climate events such as heat waves, drought,
floods, and wildfires.6 Species extinction and habitat loss is also attributed to humaninduced climate change.7 Economic loss resulting from weather or climate related events
has increased substantially across the globe in recent decades.8
The need to address excessive carbon emissions with international and national control
measures was formally endorsed with the creation of the United Nations Framework
Convention on Climate Change9 in March 1994. The Convention led to the development
of the Kyoto Protocol10 in 1997 and the commitment therein by signatory industrial
nations listed in Annex I to reduce their carbon emissions by an average of 5% below
1990 levels over the duration of an initial commitment period between 2008 and 2012. A
key aspect of the Kyoto Protocol was the establishment of a carbon emission trading
program between signatory nations, or an international cap-and-trade framework for
carbon emissions.11
This market-based regulation has since eclipsed traditional command-and-control
regulation as the preferred policy tool for placing controls on carbon emissions because it
focuses on efficient reductions; in other words, an overall reduction in carbon emissions
at the lowest possible cost. The ascendance of a cap-and-trade scheme to address climate

Intergovernmental Panel on Climate Change, Climate Change 2014: Synthesis Report (adopted November
1, 2014) at 9 - 11, Intergovernmental Panel on Climate Change, online: http://www.ipcc.ch/.
6
Ibid at 12 16.
7
Ibid at 15.
8
Ibid at 16.
9
United Nations Framework Convention on Climate Change (May 9, 1992), 1771 UNTS 107 (entered into
force on March 21, 1994).
10
Kyoto Protocol to the United Nations Framework Convention on Climate Change (December 11, 1997),
2303 UNTS 148, 37 ILM 22 (entered into force Februrary 16, 2005), online: United Nations Framework
Convention on Climate Change http://unfccc.int/resource/docs/convkp/kpeng.pdf.
11
For an overview of the Kyoto Protocol and the mechanics under the protocol to address carbon emissions
reduction see online: United Nations Framework Convention on Climate Change
http://unfccc.int/kyoto_protocol/items/2830.php.

Electronic copy available at: http://ssrn.com/abstract=2605911


change is not really a surprise. Economists have advocated for this sort of market-based
regulation to address a commons problem since the mid-twentieth century, and in
particular to address excessive emissions.12
The primary objective of market-based regulation as a control on carbon emissions is to
assign a price to the externality of emissions accumulation in the atmosphere, such that
we more accurately internalize the emissions cost into production decisions and generate
incentive for emitters to lower their level of emissions.13 Emissions allowance trading
provides those with a relatively high marginal cost of actual emissions abatement with
the option to acquire entitlements to emit from others with a lower marginal cost of
emissions. Likewise, those with a relatively low marginal cost of actual emissions
abatement have an incentive to maximize emissions reduction and profit by selling excess
entitlements into the market. The result in theory is that the commons resource is not
depleted because the market assigns a price to emissions and costs rise as overall
emissions accumulate so we do not over pollute; and allowing emitters to trade
entitlements between themselves ensures emissions abatement is implemented by those
with the lowest marginal cost thereby ensuring an overall reduction occurs at the lowest
possible cost to society.14
Despite the fact that the United Nations Framework Convention on Climate Change was
signed two decades ago and has almost 200 signatory nations, achieving international
consensus on how to reduce emissions remains elusive. The Kyoto Protocol has enjoyed
some success as a regulatory initiative to address excessive carbon emissions in the

12

The seminal work here includes Ronald Coase, The Problem of Social Cost (1960) 3 JL & Econ 1 and
JH Dales, Pollution, Property & Prices: An Essay in policy-making and economics (Toronto: University of
Toronto Press, 1968) c VI. More recent work includes Robert N Stavins, Experience with Market-Based
Environmental Policy Instruments in Karl-GoranMaler & Jeffrey Vincent, eds, Handbook of
Environmental Economics Volume 1 Environmental Degradation and Institutional Responses (Netherlands:
Elsevier, 2003) 355 and Thomas Tietenberg, Emissions Trading: Principles and Practice, 2d ed
(Washington: Resources for the Future, 2006). The first successful implementation of a market-based
trading system to address excessive emissions is the United States acid rain program used to control
sulphur dioxide emissions (Robert N Stavins, A Meaningful U.S. Cap-And-Trade System To Address
Climate Change (2008) 32 Harv Envtl L Rev 293 at 306).
13
See generally, ibid.
14
Stavins, The Problem of the Commons: Still Unsettled after 100 Years, supra note 2 at 92-103.


global atmosphere, but its shortcomings have policymakers searching for a new
international law and policy framework.
Perhaps the strongest legacy of the Kyoto Protocol is that it fostered the development of
regional and national carbon emissions trading systems. The European Union established
a multi-national carbon emissions trading system back in 2005 to facilitate compliance
with the Kyoto Protocol.15 Another example is the New Zealand emission trading system
which commenced in 2008 as a means for New Zealand to satisfy its commitment under
the Kyoto Protocol. Carbon emission reduction obligations and, in particular, carbon
trading markets have been slow to develop in North America. However, Canada and the
United States are home to several sub-national carbon emission trading systems,
including markets in California, Qubec, and Alberta. Other countries flirting with
carbon trading schemes include China, South Korea, and Mexico.16
The shortcomings of the Kyoto Protocol include the fact that nations with large carbon
emission profiles such as China and India do not have emissions reduction obligations
and achieving the reduction targets for the first compliance period ending in 2012 were
unrealistic. And as international law, the Kyoto Protocol applies to signatory nations
rather than to emitters themselves. The second commitment Kyoto period will expire in
2020, and after that a new international legal framework will succeed the Kyoto
Protocol.17 The difficulties with Kyoto have led some commentators to recommend the
new framework be a bottom up arrangement whereby regional or national carbon
emission regulatory schemes are linked together and form a global carbon market.18

15

See Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003
establishing a scheme for greenhouse gas emission allowance trading within the Community and amending
Directive 96/61/EC, [2003] OJ, L275/32. For a detailed overview of the European Union trading system
see Ellerman, Convery & De Perthius, Pricing Carbon: The European Union Emissions Trading Scheme
(New York: Cambridge University Press, 2010).
16
See The Worlds Carbon Markets: A case study guide to emissions trading (International Emissions
Trading
Association,
2014),
online:
International
Emissions
Trading
Association
http://www.ieta.org/worldscarbonmarkets.
17
For a very general overview of current international developments see online:
http://www.un.org/climatechange/towards-a-climate-agreement/.
18
See eg, Joseph E Aldy and Robert N Stavins, eds, Post-Kyoto International Climate Policy:
Implementing Architectures for Agreement (New York: Cambridge University Press, 2010).


Consistency or harmonization in design features across regional and national carbon
emission trading schemes may not be essential to form a global carbon market out of
linked regional and national systems, but it is clearly an important consideration in this
bottom up arrangement. The purpose of this study is to assess the extent to which the
Alberta, Qubec, and New Zealand schemes are consistent in design and operation, and
hopefully shed some light on the difficulties which lie ahead in the pursuit of a global
carbon market consisting of linked regional systems.

The study compares the three

carbon emission trading systems on the following four design features: (1) the emissions
cap; (2) the scope of coverage in regulated emitters; (3) the allocation of entitlements to
emit carbon; and (4) measures used to control compliance costs.

Section 2 of the paper

explains why these criteria are used for the comparison, and gives an overview of these
four elements and some variations in their design.
Why use Alberta, Qubec, and New Zealand as subjects for this study?

These

jurisdictions were chosen for a number of reasons including the simple reality that the
author had some familiarity with the mechanics of each regime before undertaking the
research, and spent several months in New Zealand during early 2014. Collectively these
three jurisdictions also provide a sample of the diversity in carbon law and policy existing
today, each has a carbon emissions compliance obligation and some form of trading
market but the mechanics of each system is very different. New Zealand also provides an
informative comparison with the Canadian systems because of key similarities amongst
the two nations. Public policy in both Canada and New Zealand is influenced to some
extent by a larger neighbor, and carbon policy is no exception. Each country has exportdriven economies with a large resource industry capable of influencing public policy on
carbon emissions. Both Canada and New Zealand are a former British colony and thus
their respective legal systems share common attributes in relation to the structure and
function of legal institutions, the legislative process and the common law. Legal process
can thus be ruled out as a variable in the comparative study.
After setting out the comparative framework in section 2, the paper examines the law and
policy governing carbon emission trading in New Zealand. New Zealand established the
5


worlds first national carbon emission trading system (NZ ETS) in conjunction with the
commencement of the first Kyoto commitment period in 2008. The analysis in section 3
identifies notable policy choices made by New Zealand in establishing the NZ ETS and
imposing carbon emissions obligations on economic actors.

The discussion also

examines the legal framework in some detail.

Section 4 describes the law and policy governing the carbon emissions regulatory
framework in the Canadian provinces of Alberta and Qubec. Some readers may ask
why this study would have a provincial focus instead of a national focus in Canada. The
reason is simply that national policy leadership on carbon emissions is almost nonexistent in Canada. Forests have fallen as the federal government mulls over policy
alternatives to address carbon emissions.19

And the current federal plan does not

incorporate market-based policies to address climate change, instead relying on proposed

command-and-control regulations to limit the intensity of carbon emissions generated by
coal-fired power plants.20 In the absence of national direction, several provinces have
implemented their own market-based carbon emissions regulatory schemes. At this time,
Alberta and Qubec are the only Canadian jurisdictions with legal rules that contemplate
a carbon market.
The last section of the paper compares the design features in each of the three systems to
make some observations in relation to: (1) the impact of each scheme thus far on
reducing carbon emissions; (2) the effectiveness of the carbon trading system on price
discovery for carbon emissions; and (3) the potential for linkage between regional
systems. The substantive rules of the three carbon emission trading systems studied here
vary extensively on each of the four design features set out in section 2. Each jurisdiction
has a unique approach to setting an emissions cap and allocating entitlements into the
market, draws its own line on the scope of coverage for compliance obligations, and has
its own take on the importance of controlling compliance costs. This paper concludes the
Qubec cap-and-trade system is the most effective of the three in achieving the goal of

19

For some discussion on previous federal initiatives see Alastair Lucas & Jenette Yearsley, The
Constitutionality of Federal Climate Change Legislation (2012) 23 J Envtl L & Prac 205.
20
See Canadas Action on Climate Change, online: http://www.climatechange.gc.ca.


carbon emissions reduction and price discovery on the entitlement to emit carbon.
However, the most valuable insight from this study is the utility of an umbrella set of
design parameters to guide the both the development of regional carbon emissions trading
systems and the enactment of their governing regulatory framework, so as to help
minimize diversity across systems and improve the prospects of a global carbon market
realized from a collection of regional, national, and subnational schemes.
2.

DESIGN FEATURES IN CARBON EMISSION TRADING SYSTEMS

The effectiveness of a carbon emission trading system to assign a price on carbon often
hangs in the balance of political maneuvering and power struggles. The design and
operation of the regulatory framework involves many policy decisions, each of which has
significant implications. As has been noted elsewhere,21 there is a strong role for the
state in the creation and operation of a carbon market. For example, government officials
must set the overall emissions cap to generate conditions of scarcity necessary for price
discovery on the costs of emitting carbon. The carbon market alone does not limit
emissions. So the amount of actual emissions reduction in a given jurisdiction depends
entirely on the policy decision to set the cap and prescribe the quantity of allowable
emissions. Likewise, the state determines who must comply with the emissions limit.
The emissions cap may apply to the entire economy or it may only apply to a specified
group of emitters, and economic actors with strong political influence may pressure
policymakers to exempt them from emission reduction obligations. A limited scope of
regulated emitters may be more palatable for political reasons and administrative ease,
however a small number of participants reduces the scope of emissions reduction and
reduces the number of traders in the carbon market and its liquidity which, in turn, affects
the ability of the market to set prices.
The role of politics in the design and operation of existing carbon schemes is readily
apparent.

Regulatory frameworks tend to exclude certain economic sectors from

21

See generally Markus Lederer, Market making via regulation: The role of the state in carbon markets
(2012) Regulation & Governance 524.


compliance obligations and/or impose less onerous reduction obligations on them. These
excluded sectors are often those with strong political influence. As is shown in section 3,
the New Zealand system, for example, does not impose emissions reduction on
agricultural activities despite the fact this sector accounts for about 50% of the nations
total carbon emissions. This political character ensures that carbon emission trading
schemes will vary in design across jurisdictions.
There is a vast amount of literature on carbon emission trading schemes, and much of it
looks at design issues such as establishing the emissions cap or deciding how
entitlements to emit are distributed into the market. A survey of the literature indicates
there are four key design elements in a carbon emission trading scheme: (1) the emissions
cap; (2) the scope of coverage in regulated emitters; (3) the allocation of entitlements to
emit carbon; and (4) measures used to control compliance costs.22 What follows is an
overview of these four elements and some possible variations in their design.
2.1 THE EMISSIONS CAP
The overall objective being a reduction in carbon emissions, the starting point is to cap
the total allowable quantity of carbon emissions during a prescribed temporal period. It

22

The literature used to develop this framework included peer reviewed journal articles in Canada and the
United States, as well as notable secondary sources. The Canadian sources are Lucas & Yearley, supra
note 19 at 215-216; Christine J Knetman, Building an Effective North American Emissions Trading
System: Key Considerations and Canadas Role (2010) 20 J Envtl L & Prac 127 at 134-142; John Goetz et
al, Development of carbon emissions trading in Canada (2009) 46 Alta L Rev 377; Grant Boyle, A
Review of Emerging GHG Emissions Trading in North America: Fragmentation or Progress? (2009) 46
Alta L Rev 174 at 177 180; Brian Evans, Principles of Kyoto and Emissions Trading Systems: A Primer
for Energy Lawyers (2004) 42 Alta L Rev 167 at 185-202. The United States sources are Joseph E Aldy
& Robert N Stavins, The Promise and problems of Pricing Carbon: Theory and Experience (2012) 21
Journal of Environment & Development 152 at 157-159; Slobodan Perdan & Adisa Azapagic, Carbon
trading: Current schemes and future developments (2011) 39 Energy Policy 6040 at 6041-6042; Judson
Jaffe, Matthew Ranson &Robert N Stavins, Linking Tradable Permit Systems: A Key Element of
Emerging International Climate Policy Architecture (2009) 36 Ecology L Q 789 at 792; Robert N Stavins,
A Meaningful U.S. Cap-And-Trade System To Address Climate Change, supra note 12 at 306-323.
Secondary sources are Blas Luis Perez Henrique, Environmental Commodities Markets and Emissions
Trading: Towards a low-carbon future (Baltimore: Taylor & Francis, 2013) at 40-43; Scott Deatherage,
Carbon Trading Law and Practice (New York: Oxford University Press, 2011) ch 3; Karsten Neuhoff,
Climate Policy after Copenhagen: The Role of Carbon Pricing (New York: Cambridge University Press,
2011) ch 3.


is important to note at the outset that an emissions trading system can exist without a cap.
The New Zealand system described in section 3 clearly illustrates this point.
For the initial compliance period, it is common for a regulatory authority to establish the
cap based on historical emissions levels.23 In order to effect a reduction in carbon
emissions, the cap is lowered over successive compliance periods.24 A clear example of
how a cap is established in law is the Qubec scheme where governing legislation
provides Ministerial power to set the maximum allowable carbon emissions per calendar
year. The Qubec scheme is discussed in detail in section 4.2 below. Another possibility
is an intensity limit, as opposed to an absolute limit, whereby the law requires an emitter
to reduce its emissions calculated per unit of economic production.

In other words, the

regulatory framework demands increasing efficiency in carbon emissions.

Each

regulated emitter must calculate a baseline intensity of carbon emissions per unit of
economic production in a facility, but absolute emission levels can increase so long as the
intensity remains below the baseline limit. As is shown in section 4.1, this is how
Alberta sets its carbon emissions cap.
2.2 THE SCOPE OF COVERAGE IN REGULATED EMITTERS
All carbon emission reduction schemes to date have commenced with a limited scope of
emitters who are subject to an emissions limit. The governing legal framework will
typically prescribe activities or, alternatively the type of facilities, which are subject to
the emissions limit.
A jurisdiction may choose to impose emissions reduction obligations on the so-called
upstream activities whereby the fossil fuel source of carbon is extracted or enters the
economy.25 An example of an upstream activity is a coal mine. A jurisdiction may also

23

The paradigm example of this is the Kyoto Protocol which established its cap based on a percentage of
1990 emission levels.
24
Stavins argues the reduction should be gradual over a long-term trajectory (Stavins, A Meaningful U.S.
Cap-And-Trade System To Address Climate Change, supra note 12 at 306-307).
25
Stavins argues a cap on emissions from upstream sources is most effective in terms of environmental and
economic considerations (ibid at 309-313).


decide to include downstream activities where carbon is released in manufacturing
processes or otherwise in the consumption of fossil fuels. The inclusion of downstream
activities and consumers will drastically increase the number of regulated entities in a
carbon emissions reduction scheme. A larger pool of regulated entities enhances the
integrity of the cap as a means to reduce carbon emissions and the liquidity of the trading
market, but also increases the complexities and cost of administration in areas such as
monitoring, compliance, and enforcement.
There is a balance to be struck between ensuring an adequate scope in coverage and
minimizing administrative costs to regulate the scheme, and where the line is drawn
varies significantly across jurisdictions. A common measure is to establish a threshold
quantity of annual emissions whereby a person who emits carbon under the threshold
quantity in a compliance period is not subject to obligations. Both the Alberta and
Qubec regimes provide an example of this, as described in section 4.
2.3 THE ALLOCATION OF ENTITLEMENTS TO EMIT CARBON
The carbon emissions entitlement is an intangible legal creation that entitles its holder to
emit a prescribed quantity of carbon. The entitlement is known by many names including
an emissions allowance, an emissions reduction unit, an emissions credit, and an
emission offset. The name or characterization of an entitlement is of some significance
as will be shown below, but the most critical design aspect is how an entitlement is
allocated into the market.26

Accordingly the legal framework governing a carbon

emission trading scheme will establish rules on how entitlements are allocated or
distributed.
In a cap-and-trade scheme, the total emissions cap for a compliance period is divided into
allowance units and distributed into the market either by free allocation, auction, or a

26

Tietenberg, supra note 12 at 127-128

10


combination of the two. Additional allocation methods may include lottery or first in
time/first in right, but these methods are not typically employed in emissions trading.27
Free allocation is the most common distribution method in an emissions trading system.28
This is likely to ensure the regulatory system is widely accepted by regulated emitters at
the outset, since those persons who receive free entitlements in an amount based on their
historical carbon emissions do not have to internalize the cost of excessive carbon
emissions unless their actual emission levels exceed their historical levels (assuming
these levels match the quantity of allowances received at no cost). The policy rationale
for free allocation may also include protecting a sector of the domestic economy from
international competitors who do not face carbon costs. But free allocation is not without
its complications; for example, the problem of how to treat new entrants into the system
who do not have a historical record of emissions.
Allocation by auction can provide a source of public funds,29 but also imposes a very
high cost on emitters since they must internalize the cost of all emissions not just those
over their historical level.

Some jurisdictions thus prefer a hybrid method of free

allocations and auction, whereby in the early stages of the program most if not all
entitlements are issued for free and only a small percentage of entitlements are reserved
for auction. The Qubec scheme is an example of the hybrid approach, and is described
in section 4.2.3.
Free allocations are typically prescribed in law, rather than left to the discretion of public
officials. For example in both Qubec and New Zealand, the governing legal framework
sets out the quantity and recipients of free emissions allowances during each compliance
period. The law has more of a procedural role in auctions by providing rules on when
and how auctions are run. An example of these sort of rules can be found in Qubec, as
described in section 4.2.3.

27

Ibid.
Ibid.
29
Tietenberg notes the state may run zero-revenue auctions whereby sale proceeds are refunded in some
fashion (ibid at 130).
28

11

An emissions reduction credit is earned by a regulated emitter rather than allocated into
the market.30 Each credit represents a quantity of carbon emissions reduced below a
prescribed baseline or threshold. The credit is recognized by the regulatory authority at
the end of a compliance period when actual emission levels are measured against the
baseline requirement. The regulated emitter earns credits to the extent their actual carbon
emissions are below the baseline set by law. The use of reduction credits eliminates the
initial allocation problem described above with free allocation, but introduces the need
for measurement and verification. A variation on the reduction credit is an emission
offset which also represents a quantity of carbon emissions reduced below a prescribed
threshold, but an offset is earned by a non-regulated emitter and, as discussed below, is
generally considered a measure to control compliance costs in a carbon emission trading
system. The Alberta system employs both emissions reduction credits and emission
offsets, as described in section 4.1.
2.4 MEASURES USED TO CONTROL COMPLIANCE COSTS
Once an entitlement is allocated to or earned by an emitter or other market participant,
the holder can submit it for compliance to cover emissions, choose to retain or bank the
entitlement for a subsequent compliance period, or trade the entitlement to another
participant. Trading carbon emissions entitlements is essential to price discovery on the
cost of emissions.31

Carbon trading is also the primary means by which regulated

emitters can manage their compliance costs.32 If abatement of actual emissions to meet a
limit is more expensive than the market price of entitlements to cover the excess
emissions, an emitter can choose to acquire the entitlements rather than reduce its own
emissions. So the market not only discovers a price on carbon emissions, trading in the
market may also provide an emitter with a less costly means of compliance. Legal

30

Tietenberg identifies notable distinctions between systems that employ earned credits and those that
allocate allowances (ibid at 18, 19).
31
Aldy & Stavins, The Promise and problems of Pricing Carbon: Theory and Experience, supra note 22
at 157.
32
Stavins, A Meaningful U.S. Cap-And-Trade System To Address Climate Change, supra note 12 at
315.

12


frameworks governing carbon emission trading systems typically direct insufficient
attention to ensuring suitable conditions exist to foster liquidity, transparency and order
in the trading market.33
Carbon emission offsets are another means of cost control for regulated emitters. A
carbon emission offset represents a quantity of carbon emissions reduced as compared
with a baseline level for the conduct of a non-regulated activity. A regulated emitter may
acquire offsets and submit them to satisfy a compliance obligation. Carbon emission
offsets are commonly generated by carbon sequestration associated with land use, land
use change and forestry or underground carbon capture and storage.34 Legal rules have a
prominent role in setting out how an emission offset is generated, measured and
validated. The Alberta system provides a good illustration of this, and is described in
section 4.1.4.
The primary concern with carbon emission offsets is whether the offset represents a real
and additional reduction in emissions.35 A legal framework which addresses this problem
will typically do so by prescribing a methodology to calculate the amount of offsets
generated by a particular activity and setting out the process by which an offset is verified
as real. The use of offsets in a cap-and-trade system has attracted some criticism, in part
because it is difficult in practice to verify real and additional emission reductions but also
because the use of an offset allows a regulated emitter to exceed its cap. This is known
as leakage: A carbon emission reduction in one activity results in an increase in emissions
elsewhere.36 One method of addressing these concerns is to enact legal rules which limit
the number of offsets that a regulated emitter can submit for compliance purposes. The
Qubec system has these sort of rules.

33

Shaun Fluker & Salimah Janmohamed, Who Regulates Trading in the Carbon Market? (2014) 26:2 J
Envtl L & Prac 81 at 109.
34
Stavins, A Meaningful U.S. Cap-And-Trade System To Address Climate Change, supra note 12 at
322.
35
Stewart Elgie, Carbon Offset Trading: A Leaky Sieve or Smart Step? (2007) 17:3 J Envtl L & Prac 235
at 249-257.
36
Ibid at 254-257.

13


Another measure to control compliance costs is to allow regulated emitters the option of
an administrative payment to cover excess carbon emissions in a compliance period. The
fund payment is based on a legally prescribed price per ton of emissions which thus
serves as the ceiling price on the cost to emit carbon.37 This ceiling may act as a cost
control measure if it is set at a low price.
The following two sections examine the law and policy governing carbon emissions in
New Zealand, Alberta, and Qubec. The examination is organized on the basis of the
design elements set out above. The last section of the paper uses these elements to assess
the effectiveness of these systems in relation to: (1) its impact thus far on reducing carbon
emissions; (2) its effectiveness at price discovery for carbon emissions; and (3) its
potential to link with other systems.
3.

CARBON EMISSION TRADING IN NEW ZEALAND

New Zealand ratified the United Nations Framework Convention on Climate Change in
September 1993, committing the nation to implement measures to reduce carbon
emissions. In late 2002 New Zealand ratified the Kyoto Protocol and committed to
reduce its overall average carbon emissions during the first Kyoto commitment period to
1990 levels.38 New Zealand subsequently enacted legislation to implement its carbon
emission trading system (the NZ ETS) effective January 1, 2008 to coincide with the
commencement of the first Kyoto commitment period.39

37

A price ceiling in a system that also employs minimum bid auctions to allocate entitlements into the
market would produce a price collar on carbon and thus significant cost certainty for regulated emitters
(Aldy & Stavins, The Promise and problems of Pricing Carbon: Theory and Experience, supra note 22 at
158).
38
New Zealand currently estimates that the country has met its Kyoto commitment (See NZ, Ministry for
the
Environment,
Latest
Update
on
New
Zealands
Net
Position,
online:
<
http://www.mfe.govt.nz/climate-change/reporting-greenhouse-gas-emissions/nzs-net-position-under-kyotoprotocol/latest> (November 12, 2014).
39
The most comprehensive examination of the legal and policy framework governing the NZ ETS is
Alastair Cameron, ed Climate Change Law and Policy in New Zealand (Wellington: Lexis Nexis, 2011).
Additional literature includes Toni E Moyes, Greenhouse Gas Emissions Trading in New Zealand:
Trailblazing Comprehensive Cap and Trade 2008 35 Ecol LQ 911; Geoff Bertram and Simon Terry, The
Carbon Challenge: New Zealands Emissions Trading Scheme (Wellington: Bridget Williams, 2010);
David Bullock, Emissions trading in New Zealand: development, challenges and design (2012) 21(4)
Environmental Politics 657.

14

The purpose of the NZ ETS is to provide incentives in the New Zealand economy to
reduce carbon emissions and to devolve the countrys Kyoto obligation to the private
sector.40 The NZ ETS remains the countrys primary mechanism to generate incentives
for carbon emissions reduction and ensure New Zealand complies with its international
commitments.41
The annual absolute level of carbon emissions in New Zealand for 2012 is calculated at
76.048 million tons of carbon, representing a rise in absolute emissions of approximately
25% over 1990 levels.42 New Zealand has an unusual emissions profile for a nation with
an industrial economy. Approximately 46% of carbon emissions in New Zealand are
generated by or associated with pastoral agriculture.43 The agricultural sector dominates
the economy with significant growth in dairy farming in recent decades, and accounts for
approximately 60% of the value in New Zealands total annual exports.44

Carbon

emissions in the agricultural sector consist of methane gas produced by livestock and
emissions associated with the use of nitrogen fertilizer.45
The governing statute on carbon emissions reduction is the Climate Change Response
Act.46 New Zealand enacted the CCRA in 2002 in conjunction with ratifying the Kyoto
Protocol to provide a legal framework for meeting its Kyoto commitment and then
amended the CCRA in 2008 and 2009 to implement the NZ ETS. The legislation and
several regulations enacted thereunder provide for a comprehensive legal framework.
The CCRA is a long, complex statute. The primary purposes of the statute include

40

NZ, Ministry for the Environment, The Framework for a New Zealand Emissions Trading System
(Wellington: Ministry for the Environment, 2007) at 14 [NZ ETS Framework], online:
http://www.mfe.govt.nz/publications/climate/framework-emissions-trading-scheme-sep07/frameworkemissions-trading-scheme-sep07.pdf.
41
NZ, Ministry for the Environment, New Zealands Greenhouse Gas Inventory: 1990 2012 (Wellington:
Ministry for the Environment, 2014) at 22 [NZ 2014 Carbon Report], online:
http://www.mfe.govt.nz/publications/climate-change/new-zealands-greenhouse-gas-inventory1990%E2%80%932012 ).
42
Ibid at 30. New Zealands claim to have met its Kyoto commitment (supra note 38) is because of net
emissions which take into account carbon sequestration from forest growth.
43
Ibid at 38, 148.
44
Ibid at 149.
45
Ibid at 148.
46
(NZ) 2002/40 [CCRA].

15


providing the rules pursuant to which New Zealand complies with its international
obligations on carbon emissions, creating the NZ ETS and establishing the compliance
obligations thereunder, and providing for the administration of both the Kyoto and NZ
ETS regimes including compliance, monitoring, and enforcement.
Parts 2 and 3 of the CCRA set out administrative provisions concerning New Zealands
Kyoto obligations. These provisions create several institutions in this regard including a
registrar to manage accounts for unit holdings and a monitoring agency to measure and
report on national carbon emissions. They also provide for the acquisition, holding, and
disposition of Kyoto units (assigned amount units, removal units, emission reduction
units, or certified emission reduction units) and New Zealand units by the Crown. Part 6
sets out provisions in relation to New Zealands emissions target, which empower the
Governor in Council to set and amend the target by regulation.
The majority of the CCRA is found in Parts 4 and 5 which establish the NZ ETS and set
out the rules which govern it. Part 4 includes provisions which set out the entities
covered by the NZ ETS, the rules on the allocation of emissions units and the submission
of units for compliance, monitoring and enforcement powers granted to the New Zealand
Environmental Protection Agency, and sanctions for non-compliance. Part 5 sets out
sector-specific provisions governing compliance obligations in forestry, manufacturing,
agriculture and waste.
3.1 THE EMISSIONS CAP
There is no domestic cap or limit on carbon emissions in New Zealand. The NZ ETS was
established as a mechanism to facilitate New Zealand meeting its Kyoto commitment
which caps the nations overall emissions between 2008 and 2012 to 1990 levels. The
country as a whole is thus liable for its carbon emissions under the first Kyoto
commitment period, but individual economic actors within New Zealand are not subject
to carbon emission limits. The compliance obligation of a regulated emitter amounts to
submitting a requisite number of emissions units to match actual emissions during a
16


compliance period.

Thus a regulated emitter is able to increase its actual carbon

emissions without penalty so long as it submits the necessary amount of emissions units.
The NZ ETS was designed to be integrated with New Zealands commitment during the
first Kyoto commitment period (2008-2012).

During this first Kyoto period each

emissions unit issued by the New Zealand government was backed by an emissions unit
held by New Zealand under the Kyoto Protocol.47 Regulated emitters were allowed to
exchange emissions units issued by New Zealand for Kyoto units held by the government
and, with a few exceptions, regulated emitters could submit Kyoto units instead of
domestic units for compliance in New Zealand.48 The decision to link the NZ ETS with
Kyoto was based, in part, on the need to generate more liquidity into the NZ ETS during
its early stages by providing regulated emitters with the ability to access emissions units
issued elsewhere.49
Regulated emitters have been able to submit an unlimited number of Kyoto units for
compliance purposes under the NZ ETS. This will change going forward because New
Zealand has chosen not to participate in the second Kyoto commitment period.50 Thus
Kyoto units other than initially assigned amount units issued to New Zealand under the
Kyoto Protocol will not be accepted for compliance under the NZ ETS after 2015.51 In
the absence of further policy changes to how emissions units are issued under the NZ
ETS, this decision will effectively cap domestic carbon emissions in New Zealand
because the number of available New Zealand units issued under the CCRA is limited.
But it remains to be seen exactly how this will unfold.

47

NZ ETS Framework, supra note 40 at 41;

NZ 2014 Carbon Report, supra note 41 at 22. Kyoto unit eligible for compliance purposes include
emission reduction units, removal units, and certified emission reductions. For a description of these units
and restrictions on the eligibility of specified types see online http://www.climatechange.govt.nz/emissionstrading-scheme/obligations/surrending-units.html> (6 April 2015).
49
NZ ETS Framework, supra note 40 at 42-47.
50
See online: http://www.climatechange.govt.nz/reducing-our-emissions/targets.html (November 12,
2014).
51
The New Zealand Emissions Trading System, online: http://www.climatechange.govt.nz/emissionstrading-scheme/obligations/surrendering-units.html (November 12, 2014).
48

17


3.2

THE SCOPE OF COVERAGE IN REGULATED EMITTERS

When it was first introduced in 2007, the NZ ETS contemplated all sector coverage in the
domestic economy with staggered entry by sectors into compliance obligations.52 Carbon
sequestration in forest growth was a key component in New Zealands plan to meet its
Kyoto obligations during the first commitment period.53 Accordingly, forestry was the
first sector subject to obligations because the government was eager to create incentives
to reduce deforestation. The other five sectors subject to compliance obligations track the
categories of economic activity set out in the Kyoto Protocol: liquid fossil fuels;
stationary energy; industrial manufacturing; agriculture; and waste.54
Within each covered economic sector, not every emitter is subject to a compliance
obligation. New Zealand policy was to select points of obligation based on minimizing
administrative costs, capturing a significant percentage of sector emissions, feasibility in
monitoring and verifying emissions, and ensuring the point of obligation generates the
desired incentives to reduce emissions while not unduly impairing economic
production.55 Generally speaking, the objective was to minimize the number of entities
with a compliance obligation while maximizing the coverage of emissions to ensure
desired incentives are generated throughout the economy. This means in practice that the
NZ ETS targets primarily upstream activities whereby the fossil fuel source of carbon is
extracted or enters the New Zealand economy.
A regulated emitter is a person described as a participant - who carries out an activity
described in Schedules 3 or 4 of the CCRA.56 The activities set out in Schedule 3 are
organized by the categories of economic activity set out in the Kyoto Protocol: forestry,
liquid fossil fuels; stationary energy; industrial manufacturing; agriculture; and waste.
Participants who conduct an activity set out in Schedule 3 are required to comply with the
obligations set out in CCRA. Participants who conduct an activity set out in Schedule 4

52

NZ ETS Framework, supra note 40 at 30-33.

Ibid.
54
Ibid.
55
Ibid at 33-36.
56
CCRA, supra note 46, s 54(1).
53

18


may elect to comply with the obligations set out the CCRA, but have no duty to do so.57
One reason why a person may voluntarily elect to be a participant under the CCRA is
because Schedule 3 participants who sell transport fuel, coal or natural gas are relieved of
their compliance obligation under the NZ ETS when they sell such energy products to a
purchaser who is a voluntary schedule 4 participant.58 Accordingly, they do not pass on
the cost of carbon emissions compliance to the purchaser. And likewise, the purchaser is
able to manage its own compliance costs by trading in the NZ ETS, rather than have costs
unilaterally imposed by their energy supplier.
Each participant is required to submit an annual emissions return to the New Zealand
Environmental Protection Agency disclosing its carbon emissions from regulated
activities and carbon sequestration from eligible activities.59 This information forms the
basis upon which a participants compliance obligation is calculated. Sections 63 and
63A of the CCRA set out the obligation of a regulated emitter to submit one New Zealand
emissions unit or one Kyoto unit for every two tons of carbon emissions in a compliance
period. The CCRA initially prescribed a one unit-for-one ton exchange, but this was
subsequently relaxed to the current one-for-two exchange in 2009 amendments as a
temporary measure to allow for a more gradual implementation of compliance
obligations.
As of May 2014 the NZ ETS registry established by the CCRA lists 2528 participants.
The following table outlines the number of participants per category of activity set out in
Schedule 3:

57

Ibid, s 57(1).
Ibid, ss 201, 202.
59
Ibid, s 65.
58

19

ParticipantsregisteredinNZETS
2500

2183

2000
1500
1000
500
0

96

10

95

25

34

79

NumberofParticipantsper
Sector

(Source: New Zealand Emissions Unit Register, online: http://www.eur.govt.nz/)

Because the NZ ETS was designed by New Zealand for Kyoto compliance, the CCRA
distinguishes the forestry sector between post-1989 forests and pre-1990 forests to reflect
the 1990 year baseline embedded in the first Kyoto commitment period. Section 181
provides that the clearing of pre-1990 forest without subsequent reforestation is
deforestation and is a Schedule 3 activity to which compliance obligations attach.60 An
example of this would be a change in land-use from forestry to agriculture. Section 180
prescribes the landowner of the cleared forest as the participant to whom compliance
obligations attach unless the right to deforest is vested in a third party and the landowner
has no control over the decision to deforest. So landowners of pre-1990 forests can
harvest and replant trees without a compliance obligation under the CCRA.
Landowners of new forest planted after 1989 may choose to participate in the NZ ETS as
a voluntary Schedule 4 participant under section 188 of the CCRA. As a participant, the
landowner is liable under the CCRA for carbon emissions based on the volume of
deforestation on their lands and must submit New Zealand emissions units or Kyoto units

60

The amount of carbon released from deforestation activity is calculated pursuant to the Climate Change
(Forestry Sector) Regulations (NZ), 2008/355.

20


to cover those emissions. As a participant in the NZ ETS the post-1989 forest landowner
is entitled to receive New Zealand emissions units for carbon sequestration in forest
growth. The amount of carbon emitted or sequestered is calculated in accordance with
the Climate Change (Forestry Sector) Regulations.61 The Crown accrues Kyoto units for
carbon sequestration in post-1989 forests where the landowner has not elected to be a
Schedule 4 participant under the CCRA. As the above chart indicates, post-1989 forest
landowners make up the large majority of participants in the NZ ETS.
In the liquid fossil fuels sector the point of compliance obligation is domestic supply of
transportation fuels prescribed by regulation.62 A person who removes more than 50,000
litres of transportation fuel per year from a refinery for the purpose of domestic supply in
New Zealand is a Schedule 3 participant under the CCRA. These persons consist of the
five fuel suppliers in New Zealand: BP Oil, Chevron, Gull, Mobil Oil, and Z Energy, as
well as companies who have elected to participate in the NZ ETS as a Schedule 4
participant.63 The amount of carbon emissions associated with transportation fuel supply
is calculated in accordance with the Climate Change (Liquid Fossil Fuels) Regulation.64
Stationary energy participants include persons who import or produce threshold amounts
of coal and natural gas for domestic supply, generate power from sources that result
carbon emissions, and burn fossil fuel in refining petroleum. The amount of carbon
emissions associated with energy production and refining is calculated in accordance
with the Climate Change (Stationary Energy and Industrial Processes) Regulation.65 In
the industrial manufacturing sector, the regulated emitter is a person who produces
designated materials set out in Schedule 3 of the CCRA such as steel or iron, imports
synthetic greenhouse gases, or operates electrical switchgear that uses sulfur
hexafluoride. The amount of carbon emissions associated with manufacturing processes
is calculated in accordance with the Climate Change (Stationary Energy and Industrial

61

Ibid, s 20.
Climate Change (Liquid Fossil Fuels) Regulation 2008 (NZ), SR 2008/356, s 4.
63
Companies who purchase large amounts of transportation fuel such as Fonterra and Air New Zealand
have elected to participate in the NZ ETS as Schedule 4 participants.
64
Climate Change (Liquid Fossil Fuels) Regulation, supra note 62, s 6.
65
(NZ), 2009/285, Part 2.
62

21


Processes) Regulation.66 In the waste sector a person who operates a landfill disposal
facility is a Schedule 3 participant, and the amount of carbon emissions associated with
waste disposal is calculated under the Climate Change (Waste) Regulation.67 Persons
who manufacture or import amounts of specified products below a threshold set out in the
Climate Change (General Exemptions) Order68 are exempt from compliance obligations
under the NZ ETS. Similarly a fuel, stationary energy, or waste disposal participant may
be eligible to reduce their compliance obligation by using a unique emissions factor
obtained in accordance with the Climate Change (Unique Emissions Factor)
Regulation.69
The current number of participants in the agricultural sector is low because farmers who
would otherwise be liable for carbon emissions associated with fertilizer application on
their land and the raising of livestock remain exempt from compliance obligations under
the CCRA.70 Agricultural participants at the moment comprise of persons who import or
produce nitrogen fertilizer, dairy processors, and those who commercially export or
slaughter livestock. These participants, however, are subject only to reporting carbon
emissions. When initially conceived in 2007, the NZ ETS contemplated full coverage in
the agricultural sector including farming by 2013.71

In 2009 the timetable for the

inclusion of agriculture was extended to January 2015.72

In 2012 the scheduled

timeframe was removed,73 and presently there is no contemplated date for the imposition
of compliance obligations on the agricultural sector.

66

Ibid, Part 3.
(NZ), 2010/338.
68
(NZ), 2009/370.
69
(NZ), 2009/286.
70
CCRA, supra note 46, ss 2A(8), 2A(9). Farming becomes subject to compliance obligations under the
CCRA upon declaration by Order in Council.
71
NZ ETS Framework, supra note 40 at 96.
72
Bullock, supra note 39 at 666.
73
The New Zealand Emissions Trading System, online: https://www.climatechange.govt.nz/emissionstrading-scheme/participating/agriculture/.
67

22


3.3 THE ALLOCATION OF ENTITLEMENTS TO EMIT CARBON
New Zealand issues emissions units by free allocation and as earned compensation for
carbon sequestration activity. The principles underlying free allocation to participants in
the industrial sector include a desire to minimize or avoid the relocation of manufacturing
activity out of New Zealand to avoid compliance costs and to reduce the economic cost
of transitioning to a low-carbon economy.74 Regulated emitters who are deemed able to
pass on the cost of compliance obligations to consumers, for example suppliers of
transportation fuel and electricity producers, do not receive free allocation of emissions
units.75 Owners of post-1989 forests and other specified activities (eg. carbon capture
and storage) earn emissions units for carbon sequestration. New Zealand allocates these
earned units based upon annual returns filed in the prescribed format.
The forestry and commercial fisheries sectors received a one-time free allocation of
emissions units as compensation for lost market value in lands which now face
restrictions on land-use (forestry) and increased input costs (fuel consumed in the
fisheries). Section 72 of the CCRA required New Zealand to allocate a prescribed
amount of emissions units to landowners of pre-1990 forests and section 74 did likewise
for holders of commercial fishing licenses. The allocation to forest landowners was
based on size of the eligible forest and the acquisition date by the landowner.
Landowners who purchased their pre-1990 forested land before November 2002 were
entitled to receive 60 emissions units per hectare, while those who purchased after that
date received 39 units per hectare.76 New Zealand set aside a total of 700,000 emissions
units for allocation to the commercial fishing industry.77
Persons who conduct eligible industrial activities prescribed by regulation are entitled
to an annual free allocation of New Zealand emissions units in accordance with sections

74

NZ ETS Framework, supra note 40 at 58-71.

Ibid.
76
Climate Change (Pre-1990 Forest Land Allocation Plan) Order 2010 (NZ), 2010/190.
77
Climate Change (Fishing Allocation Plan) Order 2010 (NZ), 2010/134.
75

23


80 to 85 of the CCRA.78 These prescribed industrial activities include the production of
listed products such as steel or newsprint, as well as a small number of grocery items
such as tomatoes or flowers.79 Some but not all of the industrial activities eligible for an
allocation of emissions units are also listed as Schedule 3 activities under the CCRA.
The allocation of units under the NZ ETS is thus distinct from a true cap-and-trade
system where the cap is divided into allowances and distributed into the market. Under
the NZ ETS only a person who conducts an eligible activity receives a free allocation of
units. Accordingly there are regulated emitters under the NZ ETS who do not receive an
allocation of emission units, and as well there are non-regulated persons who receive a
free allocation of emissions units but who do not have a compliance obligation under the
NZ ETS.
3.4 MEASURES USED TO CONTROL COMPLIANCE COSTS
The primary cost control measure in the NZ ETS has turned out to be the ability of
participants to surrender Kyoto units such as emission reduction units or certified
emission reductions acquired from international sources for compliance purposes. The
market price of these Kyoto units has plummeted to almost nothing in recent years, and
thus regulated emitters can minimize their compliance cost by importing Kyoto units into
New Zealand and submitting the international units for compliance under the CCRA.
Empirical data supports this conclusion by showing that the number of Kyoto units
submitted for compliance has dramatically increased over successive compliance periods,
with a corresponding decrease in the number of domestic New Zealand units submitted.
The flood of Kyoto units into New Zealand has also led to a collapse in the price of a
New Zealand unit from approximately $20 per unit in 2011 to about $4 per unit as of
June 2014.80

78

Eligible activities are prescribed in the Climate Change (Eligible Industrial Activities) Regulations 2010
(NZ), 2010/189.
79
Ibid.
80
OM Financial operates an over-the-counter market for New Zealand emissions units and discloses
bid/ask and closing prices on its website. See online: OM Financial https://www.commtrade.co.nz/. The

24

The following table sets out the total number of units surrendered under the NZ ETS up
to the end of 2013.

UnitssurrenderedunderNZETS
Numberofunits

60000000
50000000
40000000
30000000
20000000

NZUs

10000000

Kyotounits

0
NZUs
Kyotounits

2010

2011

2012

2013

4526

8092060

4700332

732667

396033

12396662

48678411

Typeofunit

(Source: New Zealand Emissions Unit Register, online: http://www.eur.govt.nz/)

Section 178A of the CCRA allows a regulated emitter to pay $25 per ton (effectively
$12.50 per ton under the current relaxed obligation implemented by 2009 amendments to
the CCRA, noted in section 3.2 above) in lieu of surrendering emissions units. The
legislated fund payment per ton is far in excess of the current market price of a New
Zealand emissions unit or a Kyoto unit. This would suggest there is little economic
incentive to use the fund payment for compliance purposes in the NZ ETS.
The large number of Kyoto units imported into the NZ ETS has surely diminished the
need for domestic carbon trading by regulated participants to manage compliance costs.
Carbon trading under the NZ ETS would typically involve the transfer of New Zealand
emissions units from a person who receives allocations (for example, a person who

reason for the collapse in the spot price of New Zealand emissions units was provided by Nigel Brunel
the Director of Carbon and Energy Markets with OM Financial in Auckland, New Zealand.

25


conducts an eligible industrial activity) or earns units for carbon sequestration (for
example, the owner of post-1989 forest growth) to a participant with a compliance
obligation who does not receive an allocation of New Zealand emissions units (for
example, the supplier of transport fuel). However, access to inexpensive Kyoto units has
drastically reduced the incentive for NZ ETS participants to acquire New Zealand
emissions units in the market.81
The New Zealand system does not recognize or otherwise employ carbon emission
offsets. One reason for this is perhaps because forestry is a regulated sector under the NZ
ETS. Carbon sequestration associated with land use change or forestry is incorporated
into the NZ ETS as a method of earning domestic units. And as noted in section 3.2
above forest landowners make up the majority of participants under the NZ ETS. In
other carbon emissions trading systems where carbon sequestration is conducted by nonregulated activities, the sequestration would earn credit as offsets and be available to
regulated emitters as a cost containment measure.
4.

CARBON EMISSION TRADING IN CANADA

Carbon emissions reduction has not been a policy priority for the Canadian federal
government. The absence of national direction has produced a fragmented carbon policy
landscape in Canada.

Most provinces have imposed carbon emissions reporting

obligations on certain segments of their economy, but only three jurisdictions have
enacted legal obligations with the intent of reducing carbon emissions: British Columbia,
Alberta and Qubec.82 Notwithstanding the apparent reluctance of federal officials to

81

Nonetheless some industry participants with compliance obligations have agreed to purchase New
Zealand units as part of a corporate sustainability program, despite the fact the domestic units are more
expensive than international Kyoto units. For example, Mighty River Power is one of New Zealands
largest electricity generators and is a Schedule 3 stationary energy participant under the CCRA because its
geothermal electricity generation produces carbon emissions. Mighty River has agreed to purchase New
Zealand units from owners of post-1989 forests located in regions of New Zealand where intact forests are
ecologically desirable. See media release Carbon Credit Tender, A First under ETS, online: Mighty
River
Power
http://www.mightyriver.co.nz/Media-Centre/Latest-News/2010-Archive/Carbon-CreditTender,-A-First-Under-ETS.aspx).
82
This paper does not address the question of constitutional authority over a national carbon emissions
regulatory scheme. Scholars are divided on whether the federal government or the provinces have

26


implement a national carbon policy, the now-disbanded National Roundtable on the
Environment and the Economy recommended in 2009 that Canada establish a national
cap-and-trade carbon emissions scheme as its core policy mechanism to generate a price
on carbon emissions and incentives in the economy to reduce emissions.83
Canada ratified the Kyoto Protocol in 2002 but subsequently failed to take any
meaningful steps towards implementing a legal framework to implement its Kyoto
commitment to reduce overall carbon emissions by 2012 to 94% of 1990 levels. The
2007 Kyoto Protocol Implementation Act84 was enacted in a minority Parliament with the
support of opposition parties and was meager in substantive content, consisting primarily
of enabling provisions allowing the federal government to develop a plan to meet
Canadas commitment under the Kyoto Protocol and enact regulations to limit carbon
emissions. The governing Conservatives had no intention of implementing measures
under the legislation, and after a failed attempt by environmental groups in judicial
review litigation to force the governments hand on its Kyoto commitments,85 the Kyoto
Protocol Implementation Act was repealed. Canada subsequently withdrew from the
Kyoto Protocol before the end of the first commitment period in December 2012.86
Environment Canada estimates total absolute carbon emissions in Canada during 2013 at
726 million tons, which represents an absolute increase in carbon emissions of 18% over
1990 levels.87 The following chart breaks down carbon emissions by sector in Canada.

legislative authority in this regard. Lucas and Yearsely suggest the provinces have a stronger legislative
claim than the federal government to regulate carbon emissions (Lucas and Yearsley, supra note 19), but
Peter Hogg argues the federal government has strong constitutional authority to legislate a national carbon
emissions trading system under its criminal law power (Peter Hogg, Constitutional Authority over
Greenhouse Gas Emissions (2009) 46 Alta L Rev 507). In any case, it seems likely a national carbon
trading system could emerge either as a federal initiative or as a collaborative effort amongst the federal
government and the provinces and territories.
83
National Roundtable on the Environment and the Economy, Achieving 2050: A Carbon Pricing Policy
for Canada (2009), online: http://collectionscanada.gc.ca/webarchives2/20130322180743/http://nrteetrnee.ca/wp-content/uploads/2011/08/carbon-pricing-advisory-note-eng.pdf.
84
SC 2007, c 30, as repealed by the Jobs, Growth, and Long-term Prosperity Act, SC 2012, c 19, s 699.
85
Friends of the Earth v Canada, 2009 FCA 297 (FCA), affg 2008 FC 1183 (FCTD).
86
Canada issued notification of its intent to withdraw under article 27 of the Kyoto Protocol in December
2011. For some commentary see Nigel Bankes, Why Canada Should Not Withdraw From the Kyoto
Protocol, online: http://ablawg.ca/2011/12/01/why-canada-should-not-withdraw-from-the-kyoto-protocol/.
87
Environment Canada, online: http://www.ec.gc.ca/ges-ghg/default.asp?lang=En&n=3808457C1&offset=2&toc=show.

27

Distribution of greenhouse gas emissions by economic sector, Canada, 2013

(Source:
Environment
Canada,
online:
https://www.ec.gc.ca/indicateursindicators/default.asp?lang=en&n=F60DB708-1 (17 April 2015))
The Province of Alberta is home to the largest energy development sector in Canada, and
not surprisingly is the largest source of carbon emissions in Canada and has the fastest
growth rate of absolute emissions in the country. The following graph compares carbon
emissions across Canadian jurisdictions since 1990.

28


Greenhouse gas emissions by province and territory, Canada, 1990, 2005 and 2013

(Source:
Environment
Canada,
online:
https://www.ec.gc.ca/indicateursindicators/default.asp?lang=en&n=18F3BB9C-1 (17 April 2015))
In the absence of federal leadership, carbon emission trading systems have emerged at the
provincial level in Canada.
4.1 CARBON EMISSION TRADING IN ALBERTA
Alberta was the first jurisdiction in Canada to implement legal rules governing carbon
emissions reduction.

Alberta imposed mandatory emissions reporting obligations in

2003, and subsequently enacted emissions reduction rules in 2007. The applicable legal
framework in Alberta consists of the Climate Change and Emissions Management Act88
and a number of regulations enacted thereunder including the Specified Gas Reporting

88

SA 2003, c C-16.7.

29


Regulation,89 the Specified Gas Emitters Regulation,90 as well as various policy
guidance.91

4.1.1 THE EMISSIONS CAP

There is no absolute carbon emissions cap in Alberta.

The Climate Change and

Emissions Management Act establishes what is known as an intensity baseline-and-credit

system. The legislation requires each regulated emitter to calculate a baseline intensity of
carbon emissions per unit of economic production in a facility.92 For example, in relation
to oil production the intensity figure represents the amount of carbon per barrel of
production. Over the course of successive compliance periods, a regulated emitter must
reduce its emissions intensity below its baseline by a specified percentage up to 12%.93
At the end of each compliance period, a regulated emitter must report its actual emissions
intensity per unit of production and true-up the difference between its actual emissions
and the baseline target.94 Leach provides an illustration of the true-up for an oil sands
mine facility:
The mine has an emissions performance benchmark of 0.048 tonnes per
barrel (t/bbl) of bitumen, from which it was required, in 2008, to reduce
emissions by 4 percent since it was in the second year of coverage under the
policy. Accordingly, its allowable emissions were 0.046 t/bbl. Emissions
from the mine in 2008 were 566,910 t on 7.35 million cubic metres of total
bitumen production, at an intensity of 0.077 t/bbl. As a result, the facility
faced a compliance gap of 228,969 tCO2e.95

89

Alta Reg 251/2004 [SGRR].

Alta Reg 139/2007 [SGER].
91
For a detailed critique of the Alberta system see Matthew Bramley et al, Responsible Action? An
assessment of Albertas greenhouse gas policies (Drayton Valley: Pembina Institute, 2011), online:
Pembina Institute http://www.pembina.org/reports/responsible-action.pdf).
92
SGER, supra note 90, ss 20 23.
93
Ibid, s 3.
94
Ibid, ss 5,6, 11.
95
Andrew Leach, Policy Forum: Albertas Specified Gas Emitters Regulation (2012) 60(4) Canadian Tax
Journal 881 at 888 [footnote omitted].
90

30


In basic terms, the absolute level of carbon emissions generated by a regulated facility in
Alberta can rise so long as it is matched by increased economic production.
4.1.2 THE SCOPE OF COVERAGE IN REGULATED EMITTERS
Regulated emitters in Alberta include a combination of upstream and downstream carbon
sources such as energy producers, coal-fired power generators, industrial manufacturers,
gas plants, chemical refineries, feedlot operators and landfills. The SGRR and SGER
themselves do not prescribe regulated activities, but rather the regulations referentially
incorporate the list of activities set out in the Schedule to the Environmental Protection
and Enhancement Act96 and this list covers the usual suite of stationary energy, mining,
and manufacturing activities governed by carbon emissions rules elsewhere. Noticeably
absent from coverage in Alberta, however, is the combustion of transportation fuels.
The SGRR requires annual carbon emission reports from regulated emitters who operate a
facility which emits at least 50 000 tons of carbon in a year.97 In 2011 Alberta received
emissions reports from 164 facilities. Power plants and oil sands facilities are by far the
largest sources of carbon emissions in Alberta, with 23 reporting facilities (35.4% of
reported emissions) and 27 reporting facilities (39.8% of reported emissions)
respectively.98
The SGER sets a higher emissions threshold to trigger carbon emissions reduction
obligations. Regulated emitters who operate a facility which emits at least 100 000 tons
of carbon in a year are subject to emissions intensity reduction obligations under the
SGER.99 Based on the available data for 2011, approximately 100 reporting facilities

96

RSA 2000, c E-12.

SGRR, supra note 89, s 3(1). The 50 000 threshold is set by the Specified Gas Reporting Standard issued
by
the
Minister
of
Environment
and
Sustainable
Resource
Development,
online:
http://esrd.alberta.ca/focus/alberta-and-climate-change/regulating-greenhouse-gas-emissions/greenhousegas-reporting-program.aspx.
98
Alberta Environment and Sustainable Resource Development: Report on 2011 Greenhouse Gas
Emissions, May 2013 at 6, online: http://esrd.alberta.ca/focus/alberta-and-climate-change/regulatinggreenhouse-gas-emissions/greenhouse-gas-reporting-program.aspx.
99
SGER, supra note 90, s 2.
97

31


exceeded the 100 000 ton threshold, and were subject to a reduction obligation. The
number of regulated emitters would be less than 100 since some emitters operate more
than one regulated facility.
4.1.3 THE ALLOCATION OF ENTITLEMENTS TO EMIT CARBON
The Alberta carbon scheme does not allocate emission allowances at the outset of a
compliance period. Entitlements enter the Alberta market when earned by either a
regulated emitter as an emissions performance credit or by a non-regulated entity as an
emissions offset (described in section 4.1.4 below). A regulated emitter generates one
emissions performance credit for each ton of carbon in which its reported emissions is
less than its baseline target.100 The focus of the legal framework is on measurement and
verification of the emission reduction to ensure issued credits represent real reductions.
A regulated emitter must disclose in a prescribed report whether its actual emissions are
above or below its intensity baseline for each compliance period.101

Alberta has

published technical guidance to direct regulated emitters thru the verification process.102
4.1.4 MEASURES USED TO CONTROL COMPLIANCE COSTS
In cases where its emissions intensity in a compliance period exceeds its baseline limit, a
regulated emitter has three options to cover the excess and achieve compliance: (1)
submit emissions performance credits earned in a previous compliance period or acquired
in the market from another participant; (2) submit emissions offsets acquired from a nonregulated entity; or (3) pay $15 per ton into the Climate Change and Emissions
Management Fund.103 Notably, the Alberta system does not limit the number of offsets a
regulated emitter can submit in a compliance period.

100

Ibid, s 9.
Ibid, s 11.
102
Alberta Environment has published technical guidance for the creation and submission of emissions
performance credits, see Alberta Environment, Technical Guidance for Completing Specified Gas
Compliance
Reports
(version
7.0)
(Edmonton:
Alberta
Environment,
2014),
online:
http://esrd.alberta.ca/focus/alberta-and-climate-change/regulating-greenhouse-gas-emissions/greenhousegas-reduction-program/compliance-information-for-industry/default.aspx.
103
SGER, supra note 90, ss 4(3), 5.
101

32

Alberta has a relatively mature and comprehensive carbon emissions offset program. A
carbon emission offset may be generated by a person other than a regulated emitter who
conducts a prescribed activity in a manner that reduces its carbon emissions relative to
usual methods. Section 7 of the SGER sets out rules on the creation and use of carbon
emissions offsets for compliance purposes in Alberta, although most of the details are set
out in guidance published by Alberta Environment. The carbon reduction activity must
occur in Alberta, be an action that is not otherwise required by law, and produce
emissions reductions which are measurable, replicable, and real.
Alberta employs the protocol method to establish the business-as-usual emissions
baseline from which reductions are measured for a project to calculate the generation of
carbon offsets. Any person can develop a project protocol, but the protocol must be
approved by Alberta Environment before projects conducted under the protocol will
generate carbon offsets.104 A person other than a regulated emitter can generate offsets
by conducting an activity in accordance with the protocol. A one ton reduction in carbon
emissions produced by activity relative to the business-as-usual scenario and that
complies with rules set out in the SGER and the applicable protocol results in one carbon
offset.105 There are currently 33 approved project protocols in Alberta.106
Alberta reports that since the commencement of its offset program in 2007 a total of 152
offset-generating projects had been registered as of April 2014 and approximately 32
million tons of carbon offsets created as a result.107 Agricultural land management
protocols for projects that eliminate or reduce tillage are the most common source of
offsets. The following chart illustrates the generation of carbon offsets in 2012 broken
down by project type:

104

Alberta Environment has published technical guidance on protocol development, see Alberta
Environment, Technical Guidance for Offset Protocol Developers (version 4.0) (Edmonton: Alberta
Environment, 2013), online: http://environment.gov.ab.ca/info/library/8331.pdf.
105
SGER, supra note 90, s 7(1.4).
106
Current as of 14 June 2014. See Alberta Environment, Approved Quantification Protocols, online:
http://environment.alberta.ca/02275.html.
107
Carbon Offsets Solutions, online: http://www.carbonoffsetsolutions.ca/aeor/ (date accessed June 15
2014).

33

(Source:
Carbon
Offset
Solutions,
online:
http://carbonoffsetsolutions.climatechangecentral.com/policy-amp-regulation/albertaoffset-system-compliance-a-glance/2012-compliance-year)
Of the 32 million carbon offsets produced since 2007 under approved protocols the
Alberta government reports that approximately 22 million have been submitted for
compliance.108
Compliance statistics published by Alberta Environment for the years 2008 to 2012
illustrate that payments into the Climate Change and Emissions Management Fund is the
most popular compliance mechanism used by regulated emitters to cover emissions
above their intensity limit.109 The following chart illustrates that in 2012 emissions
covered by compliance payments into the Fund eclipsed the aggregate reductions from all
other compliance options combined.

108

Carbon Offsets Solutions, online: Emissions Offsets Registry http://www.carbonoffsetsolutions.ca/aeor/

(date accessed June 15 2014).
109
Alberta Environment, online: Greenhouse Gas Reduction Program http://esrd.alberta.ca/focus/albertaand-climate-change/regulating-greenhouse-gas-emissions/greenhouse-gas-reduction-program/default.aspx.

34

Source:
Alberta
Environment,
online:
Carbon
Offset
Solutions
http://carbonoffsetsolutions.climatechangecentral.com/policy-regulation/alberta-offsetsystem-review).

Carbon emissions policy in Alberta contemplates the trading of emissions entitlements

between regulated emitters and emissions offset producers, however a carbon trading
market has been slow to develop in Alberta. There are several possible reasons for this.
Albertas 2008 Climate Change Strategy does not explicitly address carbon trading, so it
is not surprising to find little institutional support for a trading market in Alberta.110
Moreover, empirical compliance data such as the 2012 figures shown above suggests the
fund payment to the Climate Change and Emissions Management Fund is currently too
low at $15 per ton. The payment amount is set by ministerial order,111 which effectively
provides Alberta complete discretion to raise or lower this safety valve measure. Given

110

See
online,
strategy/documents/7894.pdf)
111
SGER, supra note 90, s 8(2).

<(http://esrd.alberta.ca/focus/alberta-and-climate-change/climate-change-

35


this discretionary legal structure, it is also not surprising that the fund payment is a
political topic in Alberta.112
4.2 CARBON EMISSION TRADING IN QUBEC
Qubec has a true cap-and-trade scheme which commenced on January 1, 2013. The
Qubec carbon scheme is governed by the Regulation respecting a cap-and-trade system
for greenhouse gas emission allowances113 enacted under the Environment Quality Act.114
Price discovery on carbon is a key component of the Qubecs climate change policy.115
Transportation fuels are the largest source of carbon emissions in Qubec (estimated at
43.5% of total provincial emissions in 2009), followed by industrial manufacturing
(estimated at 28% of total provincial emissions in 2009).116

However the first

compliance period in the cap-and-trade scheme, which covers the two-year period of
January 1, 2013 to December 31, 2014, did not include transportation fuels. This sector
is scheduled for compliance obligations in the second compliance period starting in
January 2015.117
4.2.1 THE EMISSIONS CAP
The carbon emissions cap in Qubec is established by a combination of enactments. The
total number of emissions allowances available to be issued by Qubec to regulated
emitters in a calendar year is capped by an Order in Council issued under section 46.7 of

112

James Wood, Premier Jim Prentice draws fire for linking carbon levy to low oil prices, Calgary
Herald
(November
7,
2014),
online:
http://www.calgaryherald.com/news/alberta/Premier+Prentice+draws+fire+linking+carbon+levy+prices/10
360315/story.html.
113
RRQ, c Q-2, r 46.1.
114
CQLR, c Q-2.
115
2013-2020 Climate Change Action Plan (Government of Qubec, 2012), online:
http://www.mddelcc.gouv.qc.ca/changementsclimatiques/pacc2020-en.htm).
116
Ibid at 7.
117
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
ss 2(2), 19(2).

36


the Environment Quality Act.118 The current Order in Council discloses the cap number
for each calendar year until 2020. The cap number lowers over successive years, taking
into account the addition of transportation fuel in 2015, in order to achieve an overall
carbon emissions reduction of 20% by 2020 relative to 1990 levels.119 Sections 19 and
21 of the Regulation respecting a cap-and-trade system for greenhouse gas emission
allowances impose a duty on regulated emitters to submit one emissions unit for one ton
of carbon emissions during a compliance period. The combination of the statutory limit
on the number of allowances which can be issued by Qubec and the statutory obligation
to submit allowances to cover carbon emissions establishes the cap.
4.2.2 THE SCOPE OF COVERAGE IN REGULATED EMITTERS
Sectors subject to carbon emissions reduction obligations in Qubec currently include
mining, oil and gas development, industrial manufacturing, power generation, natural gas
and transportation fuel distribution.120 Regulated emitters are persons with activity in one
of the prescribed sectors and generate at least 25 000 tons of carbon per year.121
Approximately 80 facilities in Qubec were subject to limits on carbon emission as of
January 1, 2013.122 The number regulated emitters would be less than 80 since some
emitters operate more than one regulated facility.
Regulated emitters are required to report their carbon emissions for each calendar year.123
For each compliance period (the initial period is 2 years, and subsequent periods are
scheduled for 3 years), a regulated emitter must submit the quantity of emissions units
equal to its reported emissions during that period.

Emissions units available for

118

OC 1185-2012.
The 2020 target is established by OC 1187-2009. See generally Climate Change Action Plan, supra
note 115.
120
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
Appendix A.
121
Ibid, s 2. Mandatory carbon emissions reporting applies to facilities that emit at least 10 000 tons per
year (Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere,
CQLR, c Q-2, r 15, s 6.1)
122
See
online:
http://www.mddelcc.gouv.qc.ca/changements/carbone/liste-etablissementsvisesRSPEDE.pdf.
123
Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere,
supra note 121, s 6.2.
119

37


compliance include units allocated or sold to regulated emitters by Qubec, a carbon
offset generated under a designated project in Qubec, and emission units or carbon
offsets from jurisdictions linked to the Qubec market.124
4.2.3 THE ALLOCATION OF ENTITLEMENTS TO EMIT CARBON
Qubec employs a hybrid of free allocation and auction to distribute entitlements to
regulated emitters. Qubec allocates the majority of available allowances under the cap
at no charge to regulated emitters involved in mining and industrial manufacturing. The
quantity of allowances allocated to a regulated emitter is based on their historical
emissions and production levels in accordance with calculations set out in the Regulation
respecting a cap-and-trade system for greenhouse gas emission allowances.125 The
purpose of free allocation is to mitigate the costs associated with emissions obligations on
Qubec industry facing international competition.126
amount of free allocation annually starting in 2015.

Qubec intends to reduce the

127

Qubec may also conduct up to four allowance auctions per year.128

The initial

minimum price per unit was $10 in 2012, and it is expected to rise annually.129 Auction
rules are set out in the Regulation respecting a cap-and-trade system for greenhouse gas
emission allowances and policy guidance.130 Generally speaking, the auction functions

124

Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
s 3(5).
125
Ibid, ss 39-44. The entities entitled to free allocations and the quantity of their entitlement are set out in
Appendix C.
126
Regulation Respecting a Cap-and-Trade System for Greenhouse Gas Emissions Allowances: Technical
Overview
(Government
of
Qubec,
2013)
at
5,
online:
http://www.mddelcc.gouv.qc.ca/changements/carbone/documentation-en.htm.
127
Minister of Sustainable Development, Environment, Wildlife and Parks, The Qubec Cap and Trade
System
for
Greenhouse
Gas
Emissions
Allowances,
online:
http://www.mddefp.gouv.qc.ca/changements/carbone/Systeme-plafonnement-droits-GES-en.htm.
128

Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
s 45.
129
Ibid, s 49.
130
Ibid, ss 45 55. User manuals and information on the auction platform are available online:
http://www.mddelcc.gouv.qc.ca/changements/carbone/documentation-en.htm.

38


as follows. The government issues public notification of an upcoming auction.131 A
regulated emitter or any voluntary participant may register to submit bids in the auction.
Only bids above the floor price are accepted. The sale price for all accepted bids is the
lowest bid price that allows for the sale of the last available units. All successful bids pay
the same price in the auction. The units sold by auction are valid for compliance in
specified or subsequent years. As of the time of writing, Qubec has completed six
auctions.132
4.2.4 MEASURES USED TO CONTROL COMPLIANCE COSTS
There is no fund payment compliance option in the Qubec scheme. Although Qubec
does have the discretion to conduct auctions by mutual agreement at a prescribed price,
which could operate as a price ceiling.133 A regulated emitter may cover up to 8% of its
carbon emissions in a compliance period using carbon offsets generated by an emissions
reduction project in accordance with a prescribed protocol.134 There are currently only
three approved offset protocols in Qubec, including the sequestration of methane gases
from livestock and landfills.135 Empirical compliance data for 2014 reveals few carbon
offsets have been submitted for compliance thus far in Qubec.136
5.

ANALYSIS

The foregoing sections of this paper have examined the carbon emissions regulatory
schemes in New Zealand and the Canadian provinces of Alberta and Qubec. The
examination of each system focused on the following four design features: (1) the

131

See
eg,
online:
http://www.mddelcc.gouv.qc.ca/changements/carbone/AvisVente_aux_encheres_27_05_2014_Ang.pdf.
132
Auction results are published online: http://www.mddelcc.gouv.qc.ca/changements/carbone/avisresultats-en.htm.
133 Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
s 56 - 64.1. The lowest prescribed price per allowance is $40 (ibid, s 58).
134
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances, supra note 113,
s 20.
135
The approved protocols and the methodology for calculating offsets generated by projects in accordance
with the protocol are listed in Appendix D of the Regulation respecting a cap-and-trade system for
greenhouse gas emission allowances, ibid.
136
See online: http://www.mddelcc.gouv.qc.ca/changements/carbone/documentation-en.htm.

39


emissions cap; (2) the scope of coverage in regulated emitters; (3) the allocation of
entitlements to emit carbon; and (4) measures used to control compliance costs. This
final section engages in a comparative analysis of the law and policy that establishes
these design features in each of the three systems. The general legal structure governing
carbon emission trading in each jurisdiction is essentially similar.

The regulatory

framework consists of a parent statute and an extensive amount of technical content in

subordinate legislation (regulations) and policy guidance. However while the general
framework has a similar structure or form across jurisdictions, the substantive content is
very distinct. Given the variations across systems, the comparative analysis in this
section attempts to elicit the relative strengths and weaknesses of each system in relation
to: (1) its impact thus far on reducing carbon emissions; (2) its effectiveness at price
discovery for carbon emissions; and (3) its potential to link with other systems. The
analysis gives the highest grade to the Qubec cap-and-trade system
It is worth reiterating at this point that the reduction of carbon emissions is not a direct
outcome of market transactions. The decision to limit carbon emissions is a public policy
choice made apart from the market and so the amount of emissions abatement in a given
jurisdiction depends primarily on the decision to establish a cap on emissions and
determine who must comply with it. The trading market itself is simply the means by
which to implement the reduction policy.137
The systems in New Zealand and Alberta demonstrate it is possible to implement a
carbon emissions trading scheme without an absolute cap on emissions. With this in
mind, it does not come as a surprise to learn that both jurisdictions have experienced
growth in carbon emissions during the lifespan of their emissions trading system. Annual
absolute carbon emissions in New Zealand rose successively between 2010 and 2012
from 73.491 to 76.048 million tons of carbon.138 Annual absolute carbon emissions from
regulated facilities in Alberta rose successively between 2008 and 2013 from an

137 Dales, supra note 12.

138

United Nations Framework Convention on Climate Change, Report on national greenhouse gas
inventory data from Parties included in Annex I to the Convention for the period 1990-2012, online: <
http://unfccc.int/resource/docs/2014/sbi/eng/20.pdf> at 14.

40


aggregate of 110.642 million tons in 2008 to 132.069 tons in 2013.139 By comparison in
a system with a true cap on emissions, regulated facilities in Qubec reported a reduction
in absolute carbon emissions during the first year of its carbon emissions trading system
in 2013. Annual absolute carbon emissions from regulated facilities in Qubec was
21.046 million tons in 2012 and 19.711 million tons in 2013.140 The legislated carbon
emissions cap in Qubec for 2013 was 23.2 million tons.141 These results provide
credence to earlier criticisms that the absence of a legislated absolute cap in New Zealand
and Alberta would mean their respective carbon emissions policy would not result in a
reduction of carbon emissions.142
But there is also the view that price discovery on the entitlement to discharge or emit is
arguably the only true objective of a market-based policy to address pollution.143 The
price of an entitlement to emit carbon is established by supply and demand forces and
trades in entitlements amongst market participants, with the marginal price of an
entitlement being that which brings together a willing seller and a willing buyer in the
market.144 The supply of entitlements at any given time in a carbon market will be
influenced by the amount of entitlements issued into the market by the regulatory
authority and the quantity of existing entitlements offered for sale by market participants.
The demand for entitlements at any given time is a function of the need to emit and the
requirement to cover emissions with entitlements.
Price discovery is weak in the carbon emissions trading systems of all three jurisdictions
studied here, but the Qubec system appears the most robust of the group because of its
allowance auctions.

In an earlier paper I have argued the legal frameworks governing

139

Environment Canada, Reported Facility Greenhouse Gas Data, online: < http://www.ec.gc.ca/gesghg/default.asp?lang=En&n=8044859A-1> (16 April 2015). The Alberta data was accessed using the
query search function to isolate data from reporting facilities located in Alberta.
140
Ibid. The Qubec data was accessed using the query search function to isolate data from reporting
facilities located in Qubec.
141
O.C. 1185-2012, supra note 118, s 1.
142
For a detailed critique of the shortcomings of the NZ ETS to limit carbon emissions see Bertram and
Terry, supra note 39. For a detailed critique of the Alberta system see Bramley et al, supra note 91.
143
The comments here about the fundamentals of price discovery in a market-based regulatory scheme are
based on the seminal work of Dales, supra note 12 at 93 97.
144
Aldy & Stavins, The Promise and problems of Pricing Carbon: Theory and Experience, supra note 22
at 157

41


carbon trading in Canada direct insufficient attention to regulating for the liquidity,
transparency and order necessary for price discovery in the trading market.145 The
Climate Change Response Act likewise has no provisions to regulate the NZ ETS on
these parameters. Carbon trading in all these jurisdictions is non-transparent, and so the
caveat with the analysis on price discovery that follows is that it is difficult to assess price
discovery with much certainty without reliable trading data.
The most transparent indicator of a carbon price in Alberta is the $15 per ton payment
made by regulated emitters into the Climate Change and Emissions Management Fund to
cover emissions above their baseline intensity limit. However this does not represent a
market price agreed to between a buyer and seller of emissions units, but rather operates
more like a carbon tax levied by the Alberta government on emissions above a threshold
level. Alberta does not allocate entitlements into the market, so there is no auction or
other mechanism upon which to assess prices. Transaction details involving the purchase
and sale of earned emissions performance credits (in the case of a regulated emitter) or
emissions offsets (in the case of a non-regulated emitter) would provide a measure of
carbon price in the Alberta market, but these details are not publicly available.
The most transparent indicator of a carbon price in Qubec is the auction reserve price for
current year allowances, and at the time of writing this was posted as $12.08 per
allowance for the May 2015 auction.146 The sale price in successive allowance auctions
under the Qubec system has risen from the initial price of $10.75 per ton in December
2013.147 The total number of emissions allowances issued into the Qubec market cannot
lawfully exceed the legislated emissions cap and each allowance represents one ton of
carbon within that cap, so the auction price does provide a measure of price discovery on
carbon emissions. However, for now Qubec employs a hybrid of free allocation and
auction to distribute entitlements to regulated emitters in a compliance period, and since

145

Fluker & Janmohamed, Who Regulates Trading in the Carbon Market?, supra note 33.
Qubec GHG Allowance Auction and Reserve Sale Platform, online: < https://www.wciauction.org/qc/en> (16 April 2015).
147
The December 2013 auction results are available online, see supra note 132.
146

42


the majority of emissions allowances are distributed at no charge to regulated emitters the
auction price does not reflect the true carbon price in the Qubec market.
The settlement price for May 2015 New Zealand units in the over-the-counter market was
$6.30 at the time of writing,148 but given how few of these units are submitted for
compliance under the NZ ETS it is questionable this represents the true cost of emitting
carbon in New Zealand. New Zealand issues emissions units by free allocation, in some
cases to entities that do not have a compliance obligation, and as earned compensation for
carbon sequestration activity.149 Given that the large majority of units submitted for
compliance under the NZ ETS have been Kyoto units, it seems the spot price for these
international units is a better reflection of the carbon price in New Zealand than the
emissions units issued by New Zealand itself.150 The spot price for Kyoto certified
emissions reduction units on ICE Futures Europe at the time of writing was only $0.55
per unit.151
In addition to poor transparency, another issue for price discovery is few numbers of
participants with emissions compliance obligations that need to acquire entitlements in
the market. In all three jurisdictions the governing legal framework prescribes the type of
activity subject to compliance obligations, with exemptions for those who emit under a
threshold level of carbon emissions. The Climate Change Response Act in New Zealand
includes a relatively wide coverage of economic sectors under compliance obligations,
but the largest number of participants, by a large margin, are owners of post-1989
forested land who earn emissions units from carbon sequestration since their timber is too
young for harvesting. These landowners thus presently contribute more to the supply of
entitlements.

The demand-side of the market in the Qubec and Alberta markets is

148

OM Financial operates an over-the-counter market for New Zealand emissions units and discloses
bid/ask and closing prices on its website. See online: OM Financial https://www.commtrade.co.nz/.
149
Bertram and Terry observe that New Zealand emissions units simply represent the transfer of wealth
from one sector (those entities with compliance obligations) to another sector (Bertram and Terry, supra
note 39 at 51 59).
150
Bertram and Terry accurately predicted that New Zealand would be a price taker in the international
market for carbon emissions units and that, accordingly, the price of carbon emissions under the NZ ETS
would reflect the cheapest of the Kyoto units (ibid at 51).
151
ICE Futures Europe, online: https://www.theice.com/products/26238355/CER-Daily-Futures/data (17
April 2015).

43


likewise meagre, each jurisdiction having only about 100 participants. However the
demand-side of the Qubec market will increase in future years with the inclusion of the
transportation fuel section in the second compliance period which commenced in January
2015 and the ability of California buyers to acquire entitlements from Qubec sellers by
virtue of their linked systems.
The absence of a limit on the supply of entitlements to emit in the New Zealand and
Alberta systems provides another difficulty for price discovery in those markets. In New
Zealand the Climate Change Response Act has allowed a regulated emitter to import an
unlimited number of international Kyoto units for the purpose of submitting them for
compliance under the NZ ETS.

Likewise in Alberta, the Specified Gas Emitters

Regulation allows a regulated emitter to submit an unlimited number of emissions offsets

acquired from non-regulated entities, and the legal framework does not prescribe a limit
on the number of offsets that can be generated by protocol projects. In contrast, the
Regulation respecting a cap-and-trade system for greenhouse gas emission allowances
limits both the type of entitlements and the number of offsets that can be used for
compliance under the Qubec system.

Regulated emitters in Qubec can submit

allowances issued by only Qubec, California or other jurisdictions formally linked to the
Qubec system, and since these allowances are based on historical emissions of regulated
emitters there will be a limit on the amount of surplus after accounting for compliance
obligations. As well, regulated emitters can only submit offsets earned by non-regulated
entities to cover up to 8% of their emissions in a compliance period. These restrictions
provide for a limit on the supply-side of the Qubec system that does not exist in New
Zealand or Alberta.
In summary, the available empirical data suggests the design of Qubecs carbon
emissions trading system is superior to that of New Zealand and Alberta in relation to: (1)
its impact thus far on reducing carbon emissions; and (2) its effectiveness at price
discovery for carbon emissions. Absolute levels of carbon emissions from regulated
entities in Qubec is falling and price discovery on the entitlement to emit carbon is more
transparent and more certain in Qubec than in the other systems. All three markets have
44


a relatively a small demand-side, but the Qubec system appears to have stronger
potential for improved demand over time.
The potential of one carbon emissions scheme to link with another system is the subject
of extensive literature,152 and the post-Kyoto global carbon policy will almost certainly
focus on linked regional systems. Aldy and Stavins survey ideas for the development of
global climate policy post-Kyoto and, in particular, explore the possibility of a new
international arrangement whereby regional and national carbon schemes are linked
together to form an effective global carbon market.153 Aldy and Stavins suggest this
bottom up approach may already be asserting itself as the global policy framework
going forward:
A new international policy architecture may be evolving on its own, based on
the reality that tradable permit systems, such as cap-and-trade systems, are
emerging worldwide as the favored national and regional approach.
Prominent examples include the European Unions Emission Trading Scheme
(EU ETS); the Regional Greenhouse Gas Initiative in the northeastern United
States; and systems in Norway, Switzerland, and other nations; plus the
existing global emission-reduction-credit system, the CDM. Moreover, capand-trade systems now appear likely to emerge as the chosen approach to
reducing greenhouse gas emissions in an additional set of industrialized
countries, including Australia, Canada, Japan, New Zealand, and the United
States.154
Consistency or harmonization in design features across regional and national emissions
trading schemes may not be essential to form a global carbon market out of linked
regional and national systems, but it is clearly an important consideration in the
development of an effective arrangement. Too much inconsistency is likely to impede
the development of any such international carbon policy architecture.

152

This study was intended to specifically address the linking of carbon emissions trading systems.
Nonetheless, some of the literature used to construct the comparative framework in section 2 does address
linkage between carbon systems. See supra note 22.
153
See generally Joseph E Aldy and Robert N Stavins, eds, Post-Kyoto International Climate Policy:
Implementing Architectures for Agreement (New York: Cambridge University Press, 2010).
154
Joseph E Aldy and Robert N Stavins, Lessons for the international policy community in Joseph E
Aldy and Robert N Stavins, ibid at 911-912.

45


In North America, the Western Climate Initiative is emerging as the foundation for a
regional carbon emissions trading system that consists of linked subnational schemes.
The Western Climate Initiative itself is an umbrella organization consisting of member
jurisdictions who agree to implement a domestic carbon emissions cap-and-trade system
following common design features and carbon emission reduction goals.155 California
and Qubec were the first two jurisdictions to formally link their cap-and-trade systems
under the umbrella of the Western Climate Initiative.156 The two jurisdictions signed an
agreement in 2013 to harmonize their respective carbon schemes effective January 1,
2014.157 Pursuant to the agreement Qubec and California mutually recognize emission
allowances and offsets distributed in each jurisdiction, allow regulated emitters to trade
the units across jurisdictions, and conduct joint allowance auctions.158 In April 2015, the
Province of Ontario announced its intention to implement a carbon emissions cap-andtrade system under the Western Climate Initiative, and link with Qubec and
California.159
The provinces of Alberta, Ontario and Qubec are the three largest carbon emitting
jurisdictions within Canada.160 The prospect of a regional carbon emissions trading
system operating in Ontario and Qubec brings forward the question of whether Alberta
will join this system. The policy answer in the short-term appears to be no: Alberta does
not intend to link its carbon emissions trading system with Qubec and Ontario.161
However the more difficult question is whether Alberta could link with these systems,

155Western
156

Climate Initiative, online: < http://www.wci-inc.org/>.

See Carbon Market: Qubec and California link their respective cap-and-trade programs, online: <
http://www.mrifce.gouv.qc.ca/en/salle-de-presse/communiques/2013/2013_10_01> (2 December 2013).
157
Agreement between the California Air Resources Board and the Gouvernement Du Qubec concerning
the harmonization and integration of cap-and-trade programs for reducing greenhouse gas emissions,
online: California Air Resources Board < http://www.arb.ca.gov/cc/capandtrade/linkage/linkage.htm>.
158
Ibid, ss 6 8. As of the time of writing, California and Qubec have completed 2 joint allowance
auctions.
159
Ontario, Cap and Trade System to Limit Greenhouse Gas Pollution in Ontario, online: <
http://news.ontario.ca/opo/en/2015/04/cap-and-trade-system-to-limit-greenhouse-gas-pollution-inontario.html> (13 April 2015).
160
Environment Canada, Greenhouse Gas Emissions by Province and Territory, online:
https://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=18F3BB9C-1 (17 April 2015).
161
James Wood and Chris Varcoe, Prentice rejects cap-and-trade emissions system as Quebec and Ontario
join forces, Calgary Herald, online: http://calgaryherald.com/news/politics/prentice-says-he-doesntfavour-cap-and-trade-emissions-system-as-quebec-and-ontario-join-forces (13 April 2015).

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even if it chose to do so. The analysis of design features set out above provides some
food for thought in this regard.
The linkage of existing emissions trading systems which developed independently of
each other almost certainly requires the participating jurisdictions to amend their
applicable legal frameworks. Even in the case of the agreement between California and
Qubec to link their carbon emission trading systems under the Western Climate
Initiative, both jurisdictions had to amend their respective legal frameworks to, among
other things, provide for recognition of allowances and offsets produced in another
jurisdiction.162

This was a relatively easy task since the design features in both

jurisdictions were developed under the common oversight of the Western Climate
Initiative.

Linking Alberta with Qubec would pose more difficulties. The design

features in the Alberta system are sufficiently distinct from those in the Qubec system
that in order for Alberta to link with Qubec necessary amendments to the Climate
Change and Emissions Management Act and the Specified Gas Emitters Regulation
would be substantial.
The intensity baseline-and-credit system implemented by the Specified Gas Emitters
Regulation in Alberta presents the fundamental barrier for linking with the Qubec capand-trade system. As described in section 4.1 above, the Alberta system does not allocate
emission entitlements in units that make up a total number of allowable emissions in a
compliance period, but rather a regulated emitter earns units (emissions performance
credits) for the amount its actual carbon emissions are below its intensity baseline in a
compliance period. Under the Alberta system, a regulated emitter who improves its
efficiencies in carbon emitted per unit of production may earn emissions performance
credits even if its absolute carbon emissions increase during a compliance period. Put
another way, Alberta may issue emissions performance credits into the market during a
compliance period that nonetheless experiences growth in absolute carbon emissions
from regulated emitters. These credits would not represent a one unit reduction in

162

For some commentary see Shaun Fluker and Rolandas Vaiciulus, Linking the California and Qubec
Emissions Trading Schemes, online: ABlawg http://ablawg.ca/2013/12/03/linking-the-california-andQubec-emissions-trading-schemes/.

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absolute emissions and are thus would not be fungible with emissions allowances issued
by Qubec under the Regulation respecting a cap-and-trade system for greenhouse gas
emission allowances. Qubec cannot recognize emission performance credits issued by
Alberta for compliance purposes without impairing the integrity of its emissions cap.
The only similarity in design between the Alberta and Qubec schemes is the scope of
regulated emitters. Otherwise, the general focus of rules in the Climate Change and
Emissions Management Act and the Specified Gas Emitters Regulation appears to be
more towards the control of compliance costs than on carbon emissions reduction or price
discovery. The fact that payments into the Climate Change and Emissions Management
Fund represent a significant portion of how regulated emitters achieve compliance places
considerable doubt on whether Alberta even has a carbon emissions trading system. The
fund payment and relatively extensive emissions offset program in Alberta contrasts with
the absence of same under the Qubec cap-and-trade system, but it is difficult to say
whether these differences represent operational barriers to linkage along the likes of the
problem created by how entitlements are allocated or earned.

Nonetheless, these

inconsistencies almost surely dampen any political incentive for the two jurisdictions to
work together and link their carbon emissions trading systems.
6.

CONCLUSION

Carbon emissions trading is firmly entrenched as a primary tool to address the global
climate commons problem. The primary objective is to assign a price to the externality
of carbon emissions and generate financial incentives for emissions reduction. The
general theory underlying carbon emissions trading systems is that the cost to emit will
rise as overall emissions accumulate in the atmosphere and encourage abatement. Those
emitters with a high marginal cost of implementing abatement technology will have the
option to acquire entitlements to emit from others with a lower marginal cost of
emissions. As such, the overall reduction in carbon emissions will occur at the lowest
possible cost to society.

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A system of tradeable entitlements to emit carbon does not, in itself, lead to a reduction in
carbon emissions.

A regulatory authority must set an emissions cap in a given

jurisdiction. The decision to prescribe a limit on carbon emissions is a policy decision

subject to the usual suite of political maneuvering and power struggles in modern
government.

Indeed the design of a carbon emissions trading system as a whole

influenced significantly by a wide range of interests. The environmental lobby calls for a
stringent cap on emissions. Economic actors lobby for exemptions from compliance
obligations. State officials seek ways to minimize administrative costs. Thus we should
expect that national or subnational carbon emissions trading systems will vary in design
and operation across the globe.
This paper examined the carbon emissions trading systems in New Zealand, Alberta, and
Qubec in relation to four common design features: (1) the emissions cap; (2) the scope
of coverage in regulated emitters; (3) the allocation of entitlements to emit carbon; and
(4) measures used to control compliance costs. The general legal structure governing
carbon emission trading in each jurisdiction is essentially similar.

The regulatory

framework consists of a parent statute and an extensive amount of technical content in

subordinate legislation (regulations) and policy guidance. However while the general
framework has a similar structure or form across jurisdictions, sections 3 and 4
demonstrate the substantive design features are very distinct. These differences implicate
the effectiveness of each system on reducing carbon emissions and establishing price
discovery on the entitlement to emit carbon. The conclusion reached here is that the
design of the Qubec cap-and-trade system is relatively superior in relation to achieving
both these objectives.
The most valuable insight from this study is the need for umbrella guidance on the design
features of regional, national or subnational carbon emissions trading systems and their
governing regulatory framework. In North America, the Western Climate Initiative is
proving to be a model in this regard. If indeed the post-Kyoto carbon policy will include
the formation of a global carbon market realized from a collection of regional, national,
and subnational schemes, domestic law and policy must strive to implement schemes
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which are consistent or harmonized to the greatest extent possible. Diversity is not a
virtue in global carbon policy.

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